The current methodology of setting dividend and interest rates on non-convertible, variable rate, fixed-income securities of traditional corporate issuers and SPVs is based on market conditions and expectations at the time of the auction or sale of non-convertible, variable rate, fixed-income security of traditional corporate issuers or SPVs. These market conditions and expectations enable potential investors to submit bids consisting of a specified dividend or interest rate, and the number of shares, bonds or units each investor is willing to purchase for a given period. The auction method is typically a Dutch auction. The variable rate for the security is set based on the highest clearing divided or interest rate that allows for all of the securities to be sold.
The variable rate may also be set by means other than an auction, such as by being linked to an objective index, including, but not limited to, term (e.g. 30, 60, 90 day) LIBOR (London InterBank Borrowing Rate) or the 60-day “AA” Composite Commercial Paper Rate, etc. The variable rate may also be set by the underwriter, initially.
In 1987, Texas Instruments Inc., a traditional industrial business, issued a Convertible Money Market Cumulative Preferred Stock (“CMMCPS”) incorporating a conversion feature, and a periodic reset (variable) rate. The Texas Instrument (TI) offered “security” included three different tranches (of varying terms), all of which were offered for sale at the same time. The dividend rate on all three tranches of the offering went to “zero” during at least one dividend period because the value of the (convertibility) option embedded in the security was greater than the dividend to be given up by investors' bidding (at auction) for a “zero” dividend. The conversion of a security like CMMCPS into shares of the underlying common stock of a traditional issuer may be dilutive to both the earnings per share (“EPS”) and book value (and thus price) of the common stock of the company.
Accordingly, the above-mentioned CMMCPS Security may not be well suited for traditional corporate convertible security issuers with high credit ratings, since the issuance (sale) of their equity may be a more expensive means for such issuers to raise capital compared to the cost of issuing traditional investment grade debt or preferred stock. In fact, no traditional corporate issuer has since attempted to issue CMMPPS securities.